B2B APM (Alternative Payment Methods) Director Dan Proctor discusses a new subscription funding model that enables channel organisations to underpin cash flow and move further and faster on their growth ambitions.
The criticality of working capital becomes ever more clearer in times of economic challenge, market disruption and the drive for business growth. And as comms sector transformation continues to accelerate and cash in the bank becomes harder to secure, it’s perhaps more important than ever to double down on cash flow management and push working capital optimisation to the top of the agenda, says Proctor.
Furthermore, as business models adapt to take advantage of new market developments and opportunities, he believes there’s room for improvement in the key area of funding. In particular, he says, the traditional leasing model has entered a terminal tailspin, which is not surprising given the move towards cloud and the subscription economy.
According to Proctor, it’s time for a new view of cashflow management to drive working capital optimisation. “We live in what is to a large degree the post-leasing telecoms economy,” stated Proctor. “Traditionally, we had on site PBXs, perpetual licences, handsets and the services needed to get systems up and running – all leasable assets. But in the subscription economy those assets no longer exist. True, there is still a number of resellers using leasing as a basis for hosted voice operations and signing customers on seven year lease contracts. But they are financing future recurring revenues and future services. It’s not the right way to do it.”
The factors that are negatively impacting working capital performance are clear, pointed out Proctor. “Access to working capital facilities is expensive with onerous securities that sit alongside it,” he added. “So what can the telco channel do? Sell part of their base to raise cash? Once you’ve done that you’ve lost your asset and diluted your equity.”
We’re living in a post-leasing world and the opportunity in subscription funding is too good to miss. It’s about financing growth
According to Proctor, providing a boost to working capital efficiency should be a key objective for comms resellers seeking to strike a balance between change management and restructuring activities that align with market changes and new opportunities. So for the past two years he has focused on developing a product that funds subscriptions, and following a eureka moment he launched a new product to the channel in February, called Liquid Subscriptions, that allows resellers to accelerate the first 12 months worth of recurring revenue on customer contracts, removing the need for a lease. “This is a timely solution to help comms resellers get cash into their business, enabling them to recruit, acquire, do whatever they need to do to ensure they make the most of the opportunities available to them,” he commented.
But first we must understand how the proposition works in the context of existing business models and wider market trends, particularly in relation to the subscription economy and move to all-IP. In practice, whether a reseller signs a 12 month rolling contract or a 36 month one, the 12 month upfront payment still applies. And on the anniversary resellers receive the next 12 months worth of monies.
The service will cost the recipient on average ten per cent of the advance. And it’s down to the reseller’s discretion to ensure they put the right customers into an agreement. Proctor noted that B2B APM will launch a portal later this year to help manage the qualifying process.
If the customer stops paying, the reseller is obligated to return the amount of monies that haven’t been used. For example, on a 12 month contract if a customer stops paying in month eight the reseller needs to return the last four months of unused monies. But they are not in a loss position as the service provision would have been halted. “This isn’t a loan or a lease,” stated Proctor. “This opens up a new way of getting cash into businesses and accelerating income.”
The funding limit is based on a financial mechanism that takes into account the balance sheet net worth of the reseller, typically two to three times the value of the balance sheet. Those meeting the criteria benefit from the increased working capital available, and according to Proctor the potential to accelerate growth in the channel is significant. “We’ve identified, based on the SIC code for telecoms, over 3,000 companies in the UK that have a net worth of over £100,000,” he explained.
Proctor is claiming a first in the telco channel with this ‘breakthrough’ alternative funding proposition. But it’s far from a new concept: The model is tried and tested and backed by Premium Credit which has a £3 billion book in the insurance market. Moreover, a successful trading platform in the SaaS space has fully proved the model. The big difference being that Proctor is accelerating 12 months worth of revenue rather than the SaaS sector average of three months.
Proctor believes that the timing of the launch could not better, because maintaining a strong level of working capital, without complexity, is essential if comms providers are to overcome barriers to their growth including the high cost of borrowing and a roadblock in the traditional leasing market, just two factors applying pressure on working capital and the liquidity required to run day-to-day operations – all at a time when the need for more cash flow has perhaps never been greater given the pace of industry change and crucial requirement for a sustainable competitive advantage.
This opens up a new way of getting cash into businesses and accelerating income
In this context, capital efficiency has to be top of mind as we approach the 2025 PSTN switch off, emphasised Proctor. “The biggest opportunity for the telco channel is the BT switch off, but this comes at a time when most telco channels have scarce cash,” he added. “So how are they going to get cash into their business to take advantage of the opportunities that we have over the next three years? The telco channel is cash hungry, and this is an attractive way of accelerating active working capital.”
Proctor is also on a mission to help upstream providers tap into this tailor-made finance solution, and he hopes to attract interest from the likes of billing providers and distributors as well as resellers. He says the financing option has broad applications across the value chain, and to accelerate growth he intends to leverage B2B APM’s experience to maximise these facilities and provide data on the billing history of clients, for example. “This is also a value added product for billing companies, distributors and aggregators,” added Proctor. “Distributors constantly experience challenges with credit facilities for customers. This is a way to help maximise cash within these businesses and ultimately lower their debt, while bringing them closer and stickier with suppliers.”
A combination of economic headwinds, rising costs, the rapid pace of industry change and the imperative for a competitive advantage, all call for the right level of working capital which for many in the channel is beyond reach. But Proctor argues that his next generation sustainable finance option will help to overcome the many pressures that could undermine working capital potential. “We are bringing alternative payment methods into the business lending channel,” he stated. “We’re living in a post-leasing world and the opportunity in subscription funding is too good to miss. It’s about financing growth in the channel.”